What is a Convenience Fee and Should You Charge One To Customers?

The costs associated with accepting credit card transactions are constantly on the rise. Between the card networks raising interchange rates and processors using every trick in the book to increase their markups, many businesses feel like they’re getting the short end of the stick.

Merchants can basically look at their gross sales and deduct 3% off the top—just to cover payment processing fees. 

To offset these costs, you might be thinking about imposing a convenience fee on your customers. But this isn’t something you can do haphazardly, as you could end up breaking the law or violating card network regulations.

Use this guide to fully understand exactly what a convenience fee is, including examples, differences between convenience fees and other charges, alternative options to consider, and more. 

What is a Convenience Fee?

A convenience fee is an additional charge that a business passes to customers for using a non-standard payment method, typically as a flat fee or a percentage of the total sale. 

Just as the name suggests, the customer is paying for the “convenience” to use a particular payment method. But this also implies that the business is giving the customer at least one other option to pay. 

For example, if you run an ecommerce store and only accept credit cards, then charging a convenience fee for online purchases wouldn’t make sense because credit cards are standard for these purchases. But if a customer wants to pay over the phone, this could be considered non-standard and warrant a convenience fee. 

Examples of Convenience Fees

To help give you a better understanding of how convenience fees work, let’s look at some common examples:

• Retail stores may charge a convenience fee for customers paying by credit card instead of cash or check.
• A concert venue or movie theater could charge a convenience fee to customers purchasing tickets online instead of going to the box office in person.
• Some utilities companies charge a convenience fee when customers pay with a credit card instead of a check.
• Landlords often charge a convenience fee if rent is paid with a credit or debit card instead of an ACH transfer.

Here’s a real example of a convenience fee charged by AvalonBay Communities for rent payments:

As you can see, this example has the convenience fee as a percentage of the payment for credit card transactions and a flat fee for debit cards. That’s because credit cards are more expensive to process than credit cards.

Renters can avoid these convenience fees by paying by ACH transfer or electronic check, with the funds coming directly from their bank accounts.

What’s the Difference Between a Convenience Fee and Surcharge Fee?

While similar and often used interchangeably, the terms “convenience fee” and “surcharge fee” are not the same. It’s crucial to understand the difference between these two fees because if you mis-label a surcharge as a convenience fee, you could be breaking the law.

The key distinction is that a convenience fee is imposed when a customer pays for something using a non-standard payment method, ultimately leading to additional costs or extra work for the merchant. They can only be charged if a standard payment method is available.

Surcharges are used to recover credit card processing fees. There are also stricter laws governing surcharges. For example, the federal government does not allow any surcharge to exceed 4% of the transaction, and it’s illegal to surcharge debit card transactions across the US. 

But each state has its own surcharge laws, and it’s outright illegal to surcharge credit card transactions in some locations. 

It’s also more common for convenience fees to be a flat fee, whereas surcharges are always a percentage of the transaction. That said, convenience fees can be a percentage (as we saw with the rent payment example earlier).

What’s the Difference Between a Convenience Fee and Service Fee?

Service fees are fundamentally different from convenience fees because they’re unrelated to how a customer pays for something. For example, you may see service fees for things like:

• Application processing fees
• Account setup fees
• Food delivery fees
• Administrative processing fees
• Installation fees

None of these have anything to do with the customer’s payment method—they are all based on specific work or services provided.

Since these two types of fees are unrelated, there could be instances when a convenience fee and a service fee are imposed on the same transaction. 

For example, let’s say you’re ordering food from a local restaurant. You might pay a $5 delivery fee and a 3% convenience fee if you choose to pay by credit card over the phone instead of cash on delivery. 

In this case, the service fee covers a specific service performed (the food delivery), while the convenience fee is charged for using a non-standard payment method (credit card over the phone). 

Both of these fees could be avoided if the customer chooses to pick up the order in person instead of getting it delivered, and pays with cash at the restaurant instead of using a card.

Are Convenience Fees Legal?

Generally speaking, convenience fees are legal in the United States. However, the laws vary by state and businesses need to be extra cautious to ensure they’re not mis-labeling fees (like surcharging transactions and just calling it a convenience fee). 

Convenience fees can only be charged for non-standard payment methods. So if you have a cashless storefront that only accepts credit cards, it would be incorrect and likely illegal to charge customers a convenience fee if they pay with a credit card—since that’s the primary payment method. But you could charge a convenience fee if your customers choose to pay over the phone.

Here’s another example, credit card surcharging is illegal in the state of Connecticut. So you can’t just surcharge transactions and call it a “convenience fee” as a loophole. Connecticut law still considers convenience fees illegal if the charge is triggered when a customer chooses to pay with a certain form of payment. 

It’s also worth noting that convenience fees cannot be charged on subscriptions, recurring payments, or payment installations. 

Should You Charge Convenience Fees to Your Customers?

This is a decision that you’ll have to make for yourself, but the first thing you need to do is make sure it’s legal in your state and that the fee doesn’t exceed an amount that violates state or federal laws. 

Assuming it’s legal in your area, you must also consider the card network rules for convenience fees. 

For example, Visa’s merchant rules state that convenience fees must be a flat rate (not a percentage of the transaction) and can only be applied if the payment is made through an alternative sales channel (like online or over the phone). 

You’ll have to determine if your business is even a candidate for imposing convenience fees. If you don’t have multiple sales channels and you don’t accept multiple types of payments, then it’s unlikely that charging a convenience fee will make sense for your business.

Alternative Options to Convenience Fees

Consumers are tired of paying extra fees. So instead of charging a convenience fee, you could consider the following alternatives:

• Offer cash discounts
• Set a minimum purchase requirement for card transactions (can’t exceed $10 per federal law)
• Adjust your pricing strategy to account for processing costs
• Encourage payment methods that are cheaper to process, like debit cards, checks, and ACH transfers
• Negotiate your processing rates

If you need help negotiating your cost of payment acceptance, our team here at MCC can help. We’ll work directly with your processor to find cost-saving opportunities so you can continue your operations uninterrupted and without having to switch processors. 

Final Thoughts

Convenience fees can ultimately be a double-edged sword for businesses. While they might help offset costs in the short term, they can also create friction with your customers and potentially drive them away. 

So before you start passing merchant fees to your customers, you should probably explore some other options. 

The easiest and most straightforward thing you can do is look for other ways to lower your costs associated with accepting payments. It doesn’t burden your customers, and you won’t have to change any of your systems. 

Negotiating those rates directly with your current processor is the first step. So pick up the phone to contact them about your options or let our team handle those negotiations on your behalf.